When Thai pulp and paper maker Advance Agro wanted to raise $150 million
for a new paper mill early this year, bankers expected that selling its bonds
would be a piece of cake. Asia was still hot, paper demand was rising, Asian
paper companies had a solid credit record, and Advance Agro was sound.
Months later, in mid-November, the company is paying the price for the world's
loss of confidence in Asia. Although its export-driven business gives it
a natural hedge against a lower baht, the demand for Advance Agro's bonds
was so weak that the firm had to trim the issue's size to $111 million. And
it ended up having to pay investors interest
of over 15%-junk-bond levels. That left it with only $100 million after costs
-- one-third less than it wanted, and at much greater expense. Advance Agro
had no choice. "Many have asked us why we are issuing the bond now," Deputy
Managing Director Paisan Srisaan said at a Hong Kong road show ahead of the
bond launch. "But our expansion plans cannot wait, and we have to follow
our strategy, even though this is going to cost us a lot." As
Advance Agro's case ably demonstrates, these are tough times for Asian firms
trying to raise money. Stockmarkets are down, banks are raising interest
rates, some finance companies have almost collapsed and bond investors are
demanding exorbitant rates of return. The evaporation of credit is hurting
companies at every level. It makes it hard for
healthy firms to inject new vitality into Asia's faltering economies, and
it means some troubled companies can barely stay afloat. The
crunch has led to: -- Postponed investments: The Gas Authority
of India was going to use the proceeds of an $800 million issue of global
depositary receipts -- shares traded outside their country of origin -- to
build a pipeline network in the country. But the company now says the issue
has been dropped because of sluggish conditions for an equity issue. And
the pipeline? Back on the drawing board. Others have been hit
too. South Korea's Samsung group announced on November 28 that it would postpone
plans to expand its new car-production plant because it couldn't get fresh
loans from creditors. Firms in a range of overcrowded industries may have
similar problems. -- Delayed debt repayments: South Korea's top
30 business groups astonished bankers on November 27 with a plea for a moratorium
on corporate debt repayments until the beginning of 1998. Claiming that it
was virtually impossible for them to get more credit from banks, the giant
business groups asked that payments on around $21 billion in borrowings that
come due in December be put off at least until the beginning of January.
-- Sellouts: Many debt-ridden Thai banks and finance companies are
talking to foreign institutions about selling stakes or even entire operations.
These discussions are complicated by Thai shareholders' fears about giving
up control, and wrangling over how much the institutions are worth.
-- Liquidations: Hong Kong's Yaohan chain of supermarkets closed shop
in late November, as did Japan's oldest brokerage, Yamaichi Securities. Both
had lost the ability to make their debt payments because credit sources had
run dry. The crunch hits almost everyone, says Sriyan Pietersz,
head of research at SocGen-Crosby in Bangkok. Even good companies are having
trouble borrowing for their working-capital needs. After Advance Agro's tough
bond sale, Pietersz predicts that other Thai companies will have similar
problems raising money: "Very few companies can mobilize funds now," he says.
With finance companies on the mat, Thai firms are having to turn to
banks. But the companies negotiate from a position of weakness, since the
banks know they have no other recourse. Companies also run into risk-shy
lenders who have been bitten badly by the bad lending decisions they made
in the past. Pietersz says banks are demanding access to a company's cash
flow as a guarantee of payment. And as Christopher Bielenberg, chief executive
of the London-based accounting consultant REL, observes, few Asian companies
these days have much cash on hand to put up. Even when companies manage to
get a loan, it's likely to be expensive: Thailand's posted prime rate has
risen to 14.5%, forcing some firms to borrow at 19%. And some lenders are
simply avoiding Asian companies altogether. "We are not offering any new
lines of credit," says a French banker on a mission to examine his bank's
exposure to Asia. "All lines were withdrawn in October. We only lend to known
clients with counter-guarantees in Paris." What happened to create
this sad state of affairs? Companies who have borrowed recklessly for years
aren't blameless. And the lack of transparency that plagues corporate accounting
in many Asian countries continues to keep bankers in the dark about just
how bad the credit risks are. "The anxiety in banking circles is very real,"
says a Hong Kong-based investment banker. "It is the fear of the unknown."
Yet it's not all gloom and doom. A small handful of companies continue to
raise money through bond deals and loans: smart Asian firms that have solid
finances which have been through the rigorous screening of investment banks,
legal firms and credit-rating agencies. The key? V. Shankar, managing director
of Bank of America's investment-banking division, lists transparency, track
record and access to a wide range of financing sources. Examples
include Indonesian pu and paper maker Pindo Deli, which in late September
raised $750 million from bonds with maturities stretching up to 30 years.
Or Asia Pu & Paper, another Indonesian firm, which had a similarly successful
$250 million equity-linked bond issue in November. India's Reliance Industries
got a $300 million loan in September to build a refinery -- heed by its record
of never having missed a payment on several bonds issued in recent years.
But while companies can control their own bottom lines, they can't control
their external environment. Advance Agro, for instance, also has a solid
track record and a still-growing paper business. But it has
suffered from global investors' general lack of confidence in Thailand. Within
the region, Thai firms have to pay the highest premiums to get investors
to buy their bonds (see chart). For Asian firms, then, the important
thing is rebuilding confidence. "What Asian companies will have to do is
what Mexico did," says an America banker in Hong Kong. That means credibility-boosting
steps like offering short-term bonds and making sure every payment is made.
It also means more transparency. And until that happens, money won't come
cheap for Asia's companies, good or bad.